[Congressional Record: July 29, 2010 (Senate)]
[Page S6513-S6514]
SEC FOIA EXEMPTION
Mr. KAUFMAN. Mr. President, I rise to discuss a provision in the
Dodd-Frank Wall Street Reform and Consumer Protection Act, section
929I, that is attracting a lot of attention today, and for good reason.
The SEC cited it yesterday in seeking to block a Freedom of Information
Act, FOIA, action brought by Fox Business News.
Press freedom is a subject that is very important to me and many
other Members of Congress, and one which our country is keen to stress
as important around the world. It would be ironic if the Dodd-Frank
bill substantially diminished our own press freedoms. This is
particularly the case in the aftermath of a devastating financial
crisis when we now hope that greater transparency into our financial
institutions, markets and regulatory agencies will help ensure that
systemic risks do not emerge and grow undetected.
[[Page S6514]]
Section 929I deals with ``records of registered persons,'' that is,
information received by the SEC in the course of its oversight duties
with respect to any person or entity registered under the Securities
and Exchange Act and other applicable laws, such as the Investment
Company Act and Investment Advisers Act. I am concerned that this
provision has been written far too broadly. Indeed, it appears to have
the effect of exempting from FOIA requests virtually all information
received by the Securities and Exchange Commission from ``registered
persons.'' An overbroad exclusion from public disclosure undermines the
strong public interest in transparency. Narrowing or eliminating this
new exclusion should be at the top of the list for a bill designed to
amend the Dodd-Frank Act.
Section 929I reads in part:
The Commission shall not be compelled to disclose records
or information obtained pursuant to section 17(b), or records
or information based upon or derived from such records or
information, if such records or information have been
obtained by the Commission for use in furtherance of the
purposes of this title, including surveillance, risk
assessments, or other regulatory and oversight activities.
Let me repeat: The Commission shall not be compelled to disclose
records or information if such records or information have been
obtained by the Commission for use in furtherance of the purposes of
this title, including surveillance, risk assessments or other
regulatory and oversight activities.
This provision is overly broad. I understand how it could help the
SEC obtain information from the firms they examine when those firms are
reluctant to turn over proprietary information that might later be
subject to FOIA requests. But FOIA already has exemptions in it to deal
with such concerns. If those exemptions need to be broadened, we should
have done so with a scalpel.
For example, the provision fails to differentiate between proprietary
information that might be turned over to the SEC during an examination,
financial information a firm may simply prefer not to provide, and
market data collected through standard surveillance activities by the
Commission. It is not difficult to imagine why hedge funds and other
trading firms would be reluctant to turn over proprietary algorithms:
Quite simply, those computer programs likely contain loads of
historical data, analysis, pattern recognition code and other tools
that comprise a trading firm's ``special sauce.'' Just as Coca-Cola and
Heinz 57 have strong motivations to keep their recipes a secret, and
have done so for generations, so too do proprietary traders have strong
incentives to guard their carefully written algorithms.
But data collected by the SEC as part of everyday surveillance
activities, including the data set to be collected pending the
Commission's approval of ``large trader'' tagging and a consolidated
audit trail, should fall into an entirely different category.
And as the Financial Crisis Inquiry Commission and the Senate's
Permanent Subcommittee on Investigations have learned, financial
companies are often reluctant to turn over extensive financial records
that permit the public to better understand complex financial
transactions and accounting practices.
As written, the exemption throws a cloak over all information
received by the Commission from the entities the SEC regulates. It is
too broad; it does not serve the public interest; it is not consistent
with the general goal of greater transparency, as President Obama has
emphasized both with respect to FOIA and financial regulatory issues,
and it should be reevaluated by the SEC and Congress.
As I understand it, the SEC has a legitimate concern now that it must
examine thousands of additional entities, including private equity and
hedge funds that must for the first time must register under the
Investment Advisers Act. In the course of those examinations, a hedge
fund may be reluctant to turn over information of a proprietary nature
because it is concerned that despite the existing exemptions written
into the FOIA statute, the hedge fund cannot be certain whether a judge
will uphold the exemption. And so the hedge fund will be reluctant to
turn over the information, and the SEC examiner may be stymied from
receiving it unless he or she turns the matter into an enforcement
action.
It may be that Congress needs to give the SEC some additional ability
to compel documents in such a situation, or perhaps provide some
narrowly tailored clarification to a FOIA exemption for financial
information of a particularly sensitive proprietary nature. But this
provision as signed into law drops a net over such information that is
far too wide.
Indeed, in writing such a broad provision, Congress may have
inadvertently encouraged registered entities to seek even more FOIA
protection before cooperating with the SEC. That is because the logical
corollary of protecting confidential information is to insist on a
wider scope of confidential information, which, in turn, further erodes
both our press freedoms and market transparency.
In addition, the SEC may be legitimately concerned that it could be
required to turn over sensitive proprietary information in response to
a third-party subpoena issued in litigation to which the SEC is not
even a party. Once again, however, Congress should carefully examine
the appropriate contours of third-party discovery requests to the SEC.
It should not categorically exclude information held by the SEC based
only upon its status as having been obtained from a ``registered
person.''
Over the last few years, the credibility of our markets has been
damaged. Only transparency can best restore that credibility; any
exemptions to transparency should hence be narrowly crafted. Section
929I needs a ``do-over.'' In the coming weeks, I hope to work with the
SEC and other Senators to craft a more reasonable approach that
satisfies the legitimate concerns of the SEC without sacrificing the
goals of transparency and public accountability.
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